In Search of the Perfect Biofuel -- and Financing to Bring It to Market

In Search of the Perfect Biofuel -- and Financing to Bring It to Market

Funny thing about the biofuels business. Roughly 200 companies are
pursuing the perfect biofuel -- as cheap as fossil fuels, adaptable to
today’s infrastructure, low-carbon, sustainable and no threat to the
food supply or to tropical forests. But even cutting-edge startups that
say they have the puzzle just about solved can’t raise the money they
need to get into commercial production.

“Everyone wants to be the first to finance the second plant,” says Arnold Klann, the CEO of biofuels firm Blue Fire Ethanol. “No one one wants to be first to finance the first one.”

“Banks are not willing to lend,” Klann said. “They’re risk averse.”
The industry needs the support of banks or the public markets because a
commercial scale will cost upwards of $100 million, more than the
venture capitalists now financing the industry want to put at risk.
Publicly-traded Blue Fire makes ethanol from wood wastes, urban trash,
rice and wheat straws, and it was awarded a $40 million U.S. Department
of Energy grant, but it has been slow to get to commercial production
and investors are skeptical. The firm’s market capitalization is only
about $25 million.

Biofuels are on my mind because I spent the day at BIO
International, a sprawling (14,000 attendees) biotech industry
convention in Atlanta. I’ve written very little about biofuels, mostly
because the science of turning plants into fuel is quite complicated,
and so it’s hard to separate companies with a shot at making it big
from those with no hope. That’s not just a challenge for me -- the corn
ethanol industry has destroyed many millions of dollars of capital from
investors who rushed in too quickly.

Still, there are strong forces driving biofuels, most of them
emanating from Washington where Congress has adopted biofuels mandates.
The historic Waxman-Markey climate change bill just passed by the House
energy committee will, if it becomes law, provide another boost to
biofuels by raising the price of gasoline and diesel fuels.

At BIO, Laurence Alexander, the managing director of investment bank
Jefferies & Co., moderated an excellent panel that taught me a
bunch of things. Some highlights:

It takes a lot of feedstock to make biofuels.
For ethanol to account for 5 percent of U.S. gasoline use, it would require
turning 33 percent of the U.S. corn crop into ethanol. Globally, it would take
100 percent of the soy, rapeseed and palm oil production to produce 10 percent of the
global supply of diesel. That’s at current yields, of course, which is
why it’s so vital to drive up yields.

Biofuels have an image problem.
“Glib critics,” Alexander said, “could shift the policy debate.” The
industry needs to prepare to answer tough questions, even if they are
only loosely based on reality: How many children did you starve to
drive to work today? Can we run out of arable land? Will biofuels drain
the acquifers?

Not all feedstocks are created equal.
I knew that, of course, but the variations in productivity are
dramatic. In terms of gallons of fuel that can be produced per acre,
according to Aristides Patrinos, the president of a company called
Synthetic Genomics, sugar cane (800) and switchgrass (500) outperform
corn (375) and jatropha (202). Still, his company, which was started by
Craig Venter, is excited about jatropha because it yields a high
quality oil, grows in poor soils and can live in semi-arid regions.
“That’s in our view an ideal fuel because it doesn’t really compete for
the same land where you can grow food,” Patrinos said. It’s ripe for
significant genetic modification to improve yields. “We’ve just
recently announced the sequencing of the jatropha genome,” he said. Who
knew?

Two well-funded startups delivered impressive presentations. One was Amyris Biotechnologies,
which I knew about. A fascinating company, backed by Kleiner Perkins,
that first produced a low-cost anti-malaria drug for the Gates
Foundation and is now making diesel fuel at a pilot plant in Northern
California. (Jack Newman, a co-founder, has twice been a popular
speaker at FORTUNE’s Brainstorm Green.) The other was Solazyme,
another Bay Area firm that uses algae to convert cellulosic feedstocks
into fuel. Harrison Dillon, the president and chief technology officer,
who also happens to be a patent lawyer, said the firm is able to make
oil-based fuels at a commercial scale but that its cost are still
higher than fossil fuels.

Because of capital constraints, it may be that well-established
players will have to enter the market to take biofuels to scaleor .
DuPont and Genencor, a division of a Danish firm called Danisco, formed
a joint venture last year to develop a cellulosic ethanol business
using corn stover or switchgrass in Tennessee, which has provided
grants to the plant and pays farmers to plant switchgrass. (It takes
three years to develop the first group) DuPont -- whose Pioneer division
hired me to moderate a panel at BIO -- and Genencor have committed to a
three-year investment of $140 million. They obviously have the capacity
to invest more if needed.

They’ve also got a track record. DuPont and Genencor got together
nearly 15 years ago to research the process that now produces a
renewable material known as bio-PDO,
which is made from corn starch, that goes into carpets, textiles and
shampoos. It’s one of the big successes of the bio-materials biz.